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EUROPEAN INVESTMENT BANK

Use of an Urban Development Fund to stimulate private investment in jobs and growth - case of Manchester (UK) Gerry Muscat, Senior Urban Specialist

Workshop – Urban Developers Network 2014 Marseille, 22-24 October 2014

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Presentation Outline • What is an Urban Development Fund?

• How to use a UDF to target employment generation?

• Manchester – An investment strategy focused on employment creation • Examples of some specific employmentgenerating investments • What are the market failures?

• Conclusions relevant for MENA 2

What is an Urban Development Fund?

• An assembler of funding from diverse investors (public and private) • Vehicle for targeting investments with specific urban objectives • Spatial / geographical focus • Vehicle for loan or equity investments • Financier for private or public projects • Provider of soft financing tailored to address market failures (if public funds available) • May be structured as a “revolving fund” 3

How do UDFs compare to other approaches to stimulate employment through urban regeneration?

• Traditional “direct development” approach: public sector acquires land, clears it, equips with infrastructure, then sells/leases to the private sector for commercial development • “Gap funding” approach: Provide investment grants to cover the difference between total development cost and costs which the market will bear (but, no public sector return) • “Urban Development Fund approach”: provide equity and loans on sub-commercial basis to leverage developers, with repayment to the public sector and revolving of funds • Sub-commercial public investments made where market cannot deliver urban regeneration by itself • Public support kept to the minimum necessary • Leverages additional projects Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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EIB Financing Instruments – where do urban development funds fit?

Instrument

Examples of potential urban financing

Investment Loans

•Loan to a City or urban development enterprise to finance an urban development project •Loan to a private partner to implement an urban investment programme under contract •Loan to a private urban developer to co-finance a commercial real estate development project

Direct loan for a specific investment project or programme, usually > EUR 25m

Framework Loans Loan for a programme of investments meeting defined criteria but not finally prepared at time of signing

Funds Investment in a fund

•Framework loan to a city or region to finance a programme of small or medium urban investments •Framework loan to a specialised municipal bank or public sector urban development agency to finance a programme of urban investments •Investment into an urban development fund, brownfield fund, fund specialised in urban investment

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Greater Manchester’s Economy

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Manchester Strategic Framework Top Priority: Employment and Economic Growth A minimum of 200 ha of employment land will be developed between 2010 and 2027 for • offices 140 ha • research and development, light industry and general industry 25 ha • distribution and warehousing 35 ha Priorities for ensuring continued economic growth include: • Improving access to jobs for all via public transport, walking and cycling; • Demonstrating that employment-generating development has fully considered opportunities to provide jobs for local people, through construction or use; • Improving the portfolio of employment premises, by providing a range of employment sites and premises for small, medium and large businesses; • Improving digital infrastructure delivery to businesses and residents; • Creating business destinations by enhancing the primary business use with ancillary commercial facilities; • Ensuring the continued social, economic and environmental regeneration of the City; • Ensuring connectivity to international markets for the import and export of goods to ensure competitiveness in international markets.

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Greater Manchester Investment Strategy

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Example of a priority area for urban regeneration: East Manchester

Note: 1. Almost the whole area is in 10% most deprived 2. Man City Etihad Stadium is in Eastlands‌ 9

Stimulating employment – what are the market failures?

• Positive externalities of urban regeneration hard to capture (eg. environmental, resource efficiency, indirect /induced employment) • Brownfield land has high costs / risks for site preparation – greenfield sites more attractive but negative externalities • Since the financial crisis the market will not construct offices without a high % of pre-let • SMEs need space but are unable / unwilling to pre-let • Banks perceive urban regeneration as high risk • Perceived risks elevated in deprived urban areas • New employers / employees / residents require improved services – urban transport, public space, culture and leisure facilities which market will not deliver alone Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Northwest Urban Investment Fund - Strategy Primarily an urban regeneration focused Fund Both UDFs target the remediation of brownfield sites, creation and/or refurbishment of new/redundant floor space and job creation UDFs can only invest in strategic sites or areas of regeneration need as defined by Local Enterprise Partnerships Market conditions are limiting the pipeline, a number of schemes still need grant and there are competing public sector schemes (Growing Places Fund) NWUIF state aid approval secured in July 2010 – which enables sub commercial debt and equity to be provided where certain conditions and requirements are met NWUIF established with in kind match and is now operating on a hybrid cofinance/co-investment model Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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The UDF approach using EU funding (JESSICA model) EUROPEAN COMMISSION Structural Funds Grant (not repayable as long as EC Regulations adhered to)

OTHER INVESTORS (Public & Private)

MEMBER STATE Via a designated Managing Authority

CITIES

Holding Fund

optional

Contribution (repayable or non-repayable) URBAN DEVELOPMENT FUND

Investment (equity, loan or guarantee)

IFIs/Public Agencies/ Banks

Projects forming part of an Integrated Plan

for Sustainable Urban Development

European Investment Bank

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Northwest Urban Investment Fund Cash and in kind In kind substituted out at project level

£50m

£50m

Northwest Urban Investment Fund £100m Managed by EIB £32.5m

Additional coinvestment at project level

£36m

Chrysalis UDF (Merseyside)

Evergreen UDF (Rest of NW)

Exhibition Centre

Soapworks

City Labs

Aiming to deliver outputs of job creation, new and refurbished floor space and redevelopment of brownfield land Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Evergreen signed project – City Labs Grade 2 Listed Building Bio-medical Research Facility Prelet – 55% - Clinical Trials Challenges – Senior Debt Evergreen – Match Senior Debt “Club” Financing Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Evergreen signed project – Soapworks Background • Former Colgate Palmolive factory in Manchester was unused and deteriorating • Signed to be refurbished and turned into green office space for a variety of sectors & other facilities

Best practice because…

• Big step in city transformation from industry to business hub • Promotes healthy lifestyle: cultural, family and sports facilities in the complex • Local employment boosts the economy in the area Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Harnessing linkages: Agent for Change and essential urban infrastructure Etihad Stadium + nearby Beswick Community Hub • Catalyst of “sport city” • Regeneration linked to Etihad • Stimulus to medical, sports, sports city culture, science industries • New school, community • Financial and in-kind swimming pool, communitycontributions from the stadium focused retail owners

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Key features of the UK UDF approach

• Investment decisions delegated to independent professional UDF fund managers • Enables leveraging of public funding at both the project level and the fund level • Creating a UDF forces emphasis on sound governance, which can build public commitment and transparency (citizens/mayors feel its “their” UDF) • Portfolio effect to mitigate risk • Revolving nature leads to sustainable approach • Flexible in tailoring sub-commercial funding to project-specific market failures Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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Conclusions relevant for the MENA region • Challenge for employment creation targeting SMEs is equally relevant in MENA as in Europe • Planning-led approach + Urban Development Strategy is key everywhere • Preference for (less sustainable) greenfield development equally strong in MENA • Fewer brownfield sites but they do exist in MENA (eg. disused airfields) • MENA can also harness agents for change • MENA does not have EU structural funds, but government funding, long-term IFI funding, waqf/kabbous funding (?), can provide some softer co-financing.

• Lack of grant funding in MENA places even greater emphasis on efficient financing approach • Urban development funds just one of may financing vehicles Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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…and to conclude – a short video clip

http://www.eib.org 19